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Improbable China

Discussion in 'The Economy' started by Tropo, 11th Nov, 2009.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    Improbable China

    On the weekends the line to see Chairman Mao’s’ body in his mausoleum in Tiananmen Square can stretch for blocks. This fall Beijing is full of Chinese tourists. In the Forbidden City, in the Summer Palace and especially in the brand new malls and shopping complexes, groups of rural tourists in matching red or yellow baseball caps troop diligently behind their guides and stare at the big new city.

    These travelers are from an older China. They come from the farms and small villages where the majority of Chinese live. In the countryside change is slow and life conservative. But almost all of what they will see in Beijing is brand new. The sleek office towers and highways, the Olympic stadiums and fleets of new cars did not exist 20 years ago; most of modern Beijing was built in the last decade. The sights of the capital must be far more amazing to a farmer from Yunnan or a herder from Gansu than to a visitor from New York, London or Moscow.

    But these visitors are not just tourists; this new China belongs to them also. Their attitude and good will matters and maintaining their support for the economic policies of the government is one of the chief goals of the Beijing rulers. If China is to continue to prosper it is these people who must be given a chance for the life that has already arrived for many others in Beijing, Shanghai and Guangzhou.

    China largely escaped the ruin that came over Western financial institutions last fall. But it could not avoid the economic effects of the debacle. The Chinese government has attempted to sustain its economy by spending more than $900 billion of its own and state bank’s funds to support its $4.3 trillion economy until the global trade system recovers and demand for goods once again flows to Chinese factories.

    Chinese economic growth since the crash of last September has never approached the standard recession definition of two consecutive quarters of negative GDP. Third quarter growth as recorded by the government was 8.9%. It was 7.9% in the second and 6.1% in the first.

    These figures are deceptive twice over. China’s population of 1.33 billion is still growing though only 0.65% a year and the government estimates that 8.0% GDP expansion is necessary just to give each year’s new workers employment. But internal migration of rural agricultural workers to the cities and economic development zones is adding uncounted millions more job seekers to the unemployment roles of the new industrial China. These workers have to be accommodated or sent home.

    Obtaining an 8% year on year increase in GDP is the bare minimum acceptable to the Beijing economic planners. In the minds of the central authorities anything lower risks the civil unrest that has so often in China’s history shaken the hold of the central government.

    The 7.7% National Bureau of Statistics growth estimate for the first three quarters of 2009 is best viewed, and probably by the government as well though not in official pronouncements, as a successful stop gap rather than a permanent accomplishment because it has been produced by an expenditure of savings rather than a permanent advance in capacity to meet expanding demand.

    Is it really surprising that a cash and credit stimulus over a year worth almost one quarter of national GDP has produced a burst of economic action? How could it be otherwise? But even the reality of the 8.9% growth can be called in question.

    Various secondary statistics including year over year figures for exports, down 23.0% in July, 23.4% in August and 15.2% in September and imports, off an average 11.8% monthly in the third quarter do not draw a picture of economic expansion let alone 8.9% activity. The Chinese economy is almost 40% dependent on exports for GDP; if exports are not increasing what is generating the demand for Chinese products? Domestic consumption, retail sales?

    As with the astonishing figures for auto sales, 70.5% higher in July, 94.7% in August and 83.6% in September which are supported by government purchase incentives, retails sales statistics are likely inflated by provisions that do not reflect actual end consumption. Retail sales rose an average of 15.36% per month year on year in the third quarter and 15.00% monthly in the second. But sales statistics include goods produced but not yet sold, the equivalent of inventory and sales numbers in the United States. Although it is probable that the Chinese economy is growing due to the massive government involvement it is improbable that it is expanding as rapidly as reported by national statisticians.

    In purely anecdotal observations over the past week the malls are full of people but buyers are few and even department store clerks resort to actively touting their goods. Everyone questioned considered prices in the property market to be highly inflated. The status of private real estate in China is unclear. Typically seventy-five year property leases are treated as ownership and bought and sold.

    China’s willingness to do what is necessary to keep its economy growing and having amassed the ability to do so on her own can certainly be applauded but Beijing’s actions should not be mistaken for an altruistic contribution to global economic well being.

    It is understandable that the world should look to China as the new economic savior. But China alone cannot support the global economy. If lower consumption and GDP have really arrived in the United States, they will not be far behind in China.

    The Peninsula Hotel in Beijing has far more staff than its counterpart in New York. Squads of doormen hail cabs, busboys compete for baggage, water glasses are filled in the restaurant without asking.
    In the department stores nearby dozens of sales clerks idly rearrange merchandise and getting there is simple, Beijing may be the easiest major city in which to find a cab. Service positions are more than plentiful in the Chinese capital. Which raises a question about Chinese business, does it not value efficiency?

    The obsession with maintaining or increasing employment represents the peculiarities of the Chinese economy and the political and social necessities of governing China. The overriding goal of the government is to provide jobs and consequently enough wealth to obviate political disenchantment and dissent.

    Chinese society has a long history of rural disaffection and a long history of respect for students. The first has been manifested many times of the past decade. Protests are usually in objection to corrupt officials and practices, in 2005 the government admitted to 70,000 incidents in the prior years. But such disputes can easily become a condemnation of the central government. This is one reason for Beijing’s harsh treatment of corrupt official and firms. Execution is a common punishment for financial crimes. The second was typified by Tiananmen twenty years ago when normal Beijing residents stood in the way of tanks on their way to Tiananmen Square, throwing up barricades to protect the students. It is an event that the Beijing Government will go to almost any length to avoid repeating and an unmentionable in political life.

    In the previous column we looked at GDP growth rates as reported by the government, 8.9% in the third quarter, 7.9% in the second and 6.1% in the first, and some possible contradictions. If the Chinese economy really grew at 8.9% in the 3rd quarter then secondary statistics should concur. But several important measures cast doubt on the probability that all is as reported.

    For one exports and imports seemed to be out of line. Exports were down an average of 20.5% monthly in the third quarter and imports fell an average of 11.8%. The Chinese economy is 38% dependant on exports for GDP and it seems odd that goods produced for export orders are then not exported. Imports include both industrial and consumer products, raw materials, components and finished products. It is counter to logic that an economy that is expanding at an 8.9 % rate would not need more imports to produce its manufactures especially since a good deal of Chinese exports are assembled from imported components.

    In this column we will look at a more basic comparison, money supply and prices. The question is the same, do the statistics make sense? If the M2 is growing at the documented rates but deflation exists at all levels of the price chain, are retail sales really expanding at the reported 15%? Where are the price pressures? If exports are down and retail sales are questionable is the 8.9% GDP creditable or sustainable?

    Chinese M2 money supply grew at a year over year average rate of 28.75% in the third quarter, 26.70% in the second quarter and 21.59% in the first. These are Chinese government figures from the People’s Bank of China (PBOC) via Bloomberg. At the same time all price measures, from wholesale goods to CPI, have fallen.

    The wholesale price index, the price of goods in inter-business transactions is down an average of 7.0 % in the third quarter, 7.6% in the second and 5.6% in the first (PBOC via Bloomberg). The producer price index representing changes in post production prices dropped 7.7 % in the third quarter, 7.2% in the second and 4.6 % in the first. Prices of retail goods slid 2.25 % in the third quarter (July and August only), 2.03 % in the second and 0.8 % in the first. The producer and retail indices are from the National Bureau of Statistics (NBS) via Bloomberg. Likewise the purchasing price index (raw materials, fuels and power) dropped 11.06 % in quarter three, 10.4 % in quarter two and 7.1 % in quarter one (NBS via Bloomberg). And finally the overall CPI was off 1.26 % in Q3, 1.53 % in Q2 and 0.6 % in Q1. The uniformity of the price direction is striking.

    For comparison United States M2 year on year growth averaged 7.6 % in the third quarter, 8.6 % in the second and 9.4 % in the first. The US Producer Price Index (PPI) was down 5.3% year on year in Q3, 4.3% in Q2 and 1.9% in Q1. CPI is down an average of 1.6% in the third quarter, 1.1% in the second and 0.06% in the first.

    Chinese M2 grew 3.8 times faster than the US in the third quarter, 3.1 times faster in the second, and 2.3 in the first. However Chinese CPI is essentially the same as the US and Chinese producer prices at several levels fell at a much faster course despite more than triple the money supply growth.

    The purpose of this exercise is not to make minute comparison of the composition of inflation rates and money supply between China and the United States but to ask the logical question--can M2 grow at these rates in an economy where GDP is expanding at 8.9% and retail sales are rising at 15% and not produce appreciably different inflation rates? And if that is logically farfetched then which parts of the M2, GDP, retail sales equation is overstated?

    Or to put the question differently where is all that money going? It is not going into goods purchases or production demand because prices are falling at the consumer level and falling dramatically at the producer level. Some of this cash must be making its way into the equities; the Shanghai Exchange is up 73% this year. Property prices are reported higher in many of the coastal and developed cities but statistical proof is sparse.

    The Chinese Government and the PBOC have flooded the economy with cash and loans. But money by itself cannot create demand and without demand it does not even produce inflation. Judging from the price levels in the Chinese economy consumer demand is minimal. If exports do not pick up who will buy the products of 8.9% growth?

    By J.Trevisani